Income Tax Appellate Tribunal - Pune
Piaggio Vehicles Pvt. Ltd., Pune vs Assessee on 28 October, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE SHRI I C SUDHIR, JUDICIAL MEMBER
AND SHRI G.S. PANNU, ACCOUNTANT MEMBER
ITA No. 1480/PN/10
(Asstt. Year: 2006-07)
Piagio Vehicle P. Ltd, .. Appellant
101/102 Phoenix,
Bund Garden Road,
Pune 410001
Vs.
Dy. Commissioner of Income-tax, .. Respondent
Cir.4, Pune
Appellant by : S/Shri R.R. Vora, Mahesh
Mandelcha & Rajendra Agiwal
Respondent by : S/Shri Hareshwar Sharma &
Mukesh Verma
ORDER
PER G.S. PANNU, A.M.:
This appeal by the assessee is directed against the order of the Dy. Commissioner of Income-tax, Cir. 4, Pune dated 28.10.2010 under section 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 (in short "the Act), pertaining to the assessment year 2006-07.
2. In this case, the substantive dispute is with regard to Ground Nos. (1) to (3) which relate to an addition of Rs 5,68,14,644/- made by the Assessing Officer on account of Transfer Pricing Adjustment to the value of international transaction undertaken by the assessee with its Associated Enterprise (AE) pertaining to the export of spare-parts and components. On this aspect, Ground Nos 1 to 3 raised by the assessee read as under:
2
"On the facts and in the circumstances of the case and in law, the Hon'ble DRP and consequentially the ld AO have:
Ground No. 1 - erred in making transfer pricing adjustment amounting to Rs 5,68,14,344/- to the value of international transaction by rejecting the analysis undertaken by the appellant to determine arm's length price for its international transaction pertaining to export of spare parts and components to the associated enterprise.
Ground No. 2 - erred in rejecting the external TNMM approach adopted by the assessee and inappropriately applying internal TNMM for determining the arm's length price for the international transaction of export of SP&C. Ground No. 3 - erred in (without prejudice to the above grounds) not allowing the benefit of the proviso to section 92C(2) of the Act (which was effective during AY 2006-07) and consequently not providing the benefit of +/-5 per cent from the arithmetic mean (arm's length price) determined by the ld TPO."
3. In brief, the facts relevant to the impugned dispute can be summarized as follows. The assessee filed its return of income for the assessment year 2006-07 declaring an income of Rs 141,64,07,566/-. Notably, the assessee company was incorporated in India as a joint venture of Greaves Limited, India and Piaggio & CS P.A. Italy (P&C). Presently, the entire shareholding of the assessee is with Piaggio & CS P.A Italy (P&C).The business of the assessee is primarily to manufacture and sale of three-wheeler and light commercial motor vehicles and it also transacted in export of spares, parts and components of two/three/four wheeled vehicles. The latter activity can hereinafter be referred to as to an activity of export of spares and components. During the year under consideration, assessee carried out 5 categories of international transactions with its Associated Enterprise, namely Piaggio & CS P.A. Italy (P&C). The assessee exported spares and components of two/three/four wheeled motor vehicles to its AE abroad to the tune of Rs 14,62,45,611/- Apart therefrom, assessee had undertaken international transactions with AEs during the year on account of export of three-wheeled motor vehicles - Rs 5,50,14,417/-, import of parts and components of four- wheeled vehicles of manufactured proto types - Rs 26,61,026/, royalty paid/payable for use of technology - Rs 19,38,38,000/- and Receipts on account of reimbursement of expenses - Rs 1,29,56,688/-. The dispute before 3 us relates to the international transaction of export/sale of spares and components to the AE.
4. The assessee had benchmarked its international transaction of export of spares and components to AE by applying the Transactional Net Margin Method (i.e. TNMM) based on a search conducted to identify comparable companies as per the 'Prowess' and 'Capitaline plus' databases. On selection of 10 external comparable companies, assessee used Earning Before Tax (EBT) to sales to determine the relevant Profit Level Indicator (i.e. PLI) and average operating margin of comparable companies worked out to 1.83% as against assessee's operating margin of 10.40% in its segment of export of spares and components to AEs. As the operating margin of the assessee was higher than the average of margins declared by the external comparable companies, assessee asserted that the international transaction of activity of export of spares and components carried out during the year with its AE was at an arm's length from the perspective of transfer pricing analysis. So, however, in the proceedings carried out by the Transfer Pricing Officer (in short "the TPO") under section 92CA(2) of the Act, the assessee's assertion was rejected. The TPO rejected the application of external TNMM adopted by the assessee and instead applied internal TNMM mechanism in order to benchmark the international transaction relating to export of spares and components to AE. The TPO analyzed the profitability of the exports undertaken by the assessee to its AE on one hand and compared it to the profitability of the exports undertaken by the assessee to third parties (i,e. non- AEs). On the basis of such an analysis, the TPO noticed that the net profit margin (on cost) pertaining to export sales to AEs was 11.63% and the net profit margin (on cost) pertaining to third party exports, (i.e. to non-AEs) was 56.58%. Based on this analysis, the TPO proposed an adjustment of Rs 5,68,14,344/- to the international transaction pertaining to the export of spares 4 and components to AE and as a consequence, the Assessing Officer has made an addition of Rs 5,68,14,344/- to the returned income.
5. The assessee in proceedings before the Dispute Resolution Panel (DRP) was unsuccessful in assailing the adjustment to the international transaction as proposed by the TPO. The objections taken by the assessee before the DRP were on similar lines as taken before us and can be summarized as follows. As per the assessee, the income-tax authorities have erred in rejecting the external TNMM approach adopted by the assessee and has instead inappropriately applied the internal TNMM mechanism for ascertaining the arm's length price of the international transaction in question. Before us, the learned Counsel for the assessee has pointed out that the income-tax authorities have wrongly rejected the analysis undertaken by the assessee to ascertain the arm's length price of the international transaction. The learned Counsel pointed out that having regard to the assessee's internal practices for undertaking transactions with AEs and non-AEs, it was concluded that there are no internal comparable transactions, which could be used for benchmarking the impugned transaction of export of spares and components to its AEs and therefore, the assessee had preferred to apply external TNMM in order to ascertain the arm's length price of the international transactions relating to export of spares and components to AEs.
6. Notwithstanding the aforesaid, the learned Counsel pointed out that the internal TNMM approach adopted by the income-tax authorities has been quite inappropriately applied. In this regard, the analysis carried out by the TPO has been illustrated as below:
S.No Domestic party Third party AE export
export(non-AE)
Sales(Rs) 52,94,61,000 1,54,51,000 14,11,20,000
5
Net Profit (Rs) 7,55,91,000 55,83,000 1,47,09,000
Total cost (Rs) 45,38,70,000 98,68,000 12,64,11,000
Net Profit 16.65% 56.58% 11.63%
margin (on
cost)
It is explained that on the above basis, the TPO has arrived at an adjustment of Rs 5,68,14,344/- to the transfer price of the impugned transaction by comparing the margin of 11.63% for AE export with the margin of 56.58% for third party exports (non-AEs). It is pointed out that the margin of 11.63% included a sub-segment of the transactions of exports to AE of the spares and components required for servicing of the vehicles sold by the assessee and also the sub-segment of sourcing of components by the overseas AE for manufacture of two/three wheelers, and for manufacture of four wheelers, namely, 'New Quadracycle Poker'. Further, the margin of 56.58% for non-AEs include only the export of spares and components to third party distributors required for servicing of vehicles sold by the assessee. In this manner, it is sought to be pointed out that the aforesaid sub-segments involve incomparable activities and therefore the margin of 56.58% on exports to non- AEs cannot be a benchmark to evaluate the arm's length feature of assessee's margin of 11.63% on exports to AE.
7. The assessee has explained the varied nature of transactions which are comprised in the sales of 'spares and components' amounting to Rs 14,62,45,611/-. It has been explained that three categories of transactions are carried out in the activity of sale of 'spares and components'. We may summarize the activities as follows - Category 'A' represents sale of spares by the assessee to third party distributors as well as to the AEs, which are required for the purposes of servicing the vehicles sold by the assessee company; Category 'B' represents sourcing of components required by the 6 overseas AEs for manufacture of two and three-wheelers; and Category 'C' represents sourcing of components required by the overseas AEs for manufacture of four-wheelers, namely, New Quadracycle Poker. The point sought to be made out by the assessee is that the export to third parties (i.e. non-AEs) is comprised of only Category 'A' transactions, which has yielded the margin of 56.58%, whereas the exports to its AEs comprise of transactions of all three Categories, i.e. 'A', 'B' and 'C', which has yielded the margin of 11.63% and therefore the two are incomparable. By referring to the following Chart depicting the operating margins of various sub-segments of the transactions' of the sales of spares and components:
Particulars Sales to Export to
Non-AEs AE
Domestic Exports to Total sales Spares- Global Total
parties - third to Non-AEs BO sourcing and Exports to
spares BO parties - (service NQP(sourcing AE
(service spares spares) activities)
spares) BO
(service
spares)
Sales (Rs) 529461000 15451000 544912000 2186000 138934000 141120000
Net Profit 75591000 5583000 81174000 877000 13832000 14709000
(Rs)
Total cost 453870000 9868000 463738000 1309000 125102000 126411000
(Rs)
Profit 14.27% 36.13% 14.90% 40.12% 9.96% 10.40%
margin (on
sales)
Profit 16.65% 56.58% 17.50% 67% 11.05% 11.63%
margin (on
cost)
the assessee has pointed out that in relation to Category 'A' transactions, the operating margin on exports to AEs is 67% as against 56.58% with respect to the export to third parties (non-AEs) and therefore on this count itself the adjustment in question is untenable.
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8. On the other hand, the learned CIT-Departmental Representative, appearing for the Revenue has defended the action of the authorities below by pointing out that the sub-segmentation of the activity within the transaction of export of spares and components is not called for. According to the Revenue, all the three Categories of transactions, namely, 'A', 'B' and 'C' constitute a singular activity. The entire activity is of supply of spares by the assessee to third party distributors and its AEs. It is pointed out that the spares being supplied to third parties and to the AEs may differ in their applications as stated, but spares remain spares. Therefore, the sub-segmentation canvassed by the assessee in order to benchmark the transaction is not relevant and has been rightly rejected by the income-tax authorities.
9. On this aspect, we have carefully considered the rival stands. It is a well-settled proposition that while carrying out the transfer pricing study of an international transaction, it is imperative that a comparison is made with the similarly placed transactions, as far as possible. In the present case, as noted earlier, the assessee benchmarked its International transaction of export of spares and components to its AE on the basis of TNM Method by relying on external comparable companies. So, however, the income-tax authorities have applied an internal TNMM mechanism in order to benchmark the impugned International transaction. The TPO analyzed the profitability of exports of spares and components to AEs on one hand, and compared it to the profitability of export of spares and components made by the assessee to third parties (i.e. non-AEs). At the threshold, the assessee has assailed the use of internal TNMM mechanism as inappropriate and has pointed out that the use of TNMM mechanism based on external comparable is more appropriate. Initially, we do not take up this controversy, which we shall deal with a little later. However, another pertinent plea of the assessee is to the effect that even the internal TNMM mechanism applied by the income-tax authorities is 8 quite inappropriate and, therefore, the same has resulted in an unjustified adjustment to impugned International transaction. This aspect of the matter is being addressed at this stage. The assessee undertakes three categories of transactions in the course of the sale of spares and components. The three categories have been noted by us in the earlier part of the order and to briefly recapitulate, the same are as follows: Category 'A' transaction represents sale of spares by the assessee to third party distributors as well as to the AEs of such spares/components which are required for the purpose of servicing the vehicles sold by the assessee company. Category 'B' transactions represent sourcing of components required by the overseas AEs for manufacture of 2/3 wheelers, and category 'C' transactions represent sourcing of components required by the overseas AEs for manufacture of 4 wheelers, namely, New Quadracycle Poker. On the basis of submissions and material put-forth, it is sought to be explained that the category 'B' and category 'C' transactions involve supply to AEs (situated in Italy) of such parts and components which are used by the AE in the manufacture of vehicles abroad. It is sought to be made out that the source evaluation, pricing and procurement tests are the prerogative of the AE and that the assessee company based in India merely assists in logistic, co-ordination and facilitation/support services in respect of sourcing of such components. On the other hand, with regard to the category 'A' transactions, it involves supplies to third parties as well as AEs of the spares and components which are required for the purposes of servicing the vehicles manufactured and sold by the assessee company. In this category, the spares and components supplied are manufactured to the specifications prescribed the assessee company and as per the designs, dies, quality, packaging, etc., as mandated by the assessee company. On this basis, the assessee has attempted to point out that the margins in category 'A' transactions cannot be compared with the transactions of category 'B' and 'C', 9 inasmuch as it involves functional and economic differences. It is sought to be made out that with regard to category 'B' and 'C' transactions, the assessee does not earn the kind of margins as it can earn by undertaking transactions of category 'A'.
10. In our considered opinion, the net profit margin in any particular kind of activity is indeed effected by various factors which are industry-specific and can also be unit-specific having regard to the degree of business experience enjoyed by an entity. The factors which can be industry-specific, for example can be in the field of competitiveness, new entrants, product differentiation and other Government regulations, etc. It is therefore quite imperative that while undertaking transfer pricing analysis one must examine the transactions undertaken with regard to the relevant factors effecting such transactions vis- à-vis transactions sought to be compared. In this context, we may now appreciate the distinction being set-up by the assessee in relation to transactions of category 'B and 'C' on one hand and the transactions of category 'A' on the other. With regard to the transactions of category 'B' and 'C', which is in the realm of sourcing of components, quite clearly the same is in the nature of industrial supplies, which are in-turn, used by the buyer in manufacturing of vehicles and the services being rendered by assessee is merely logistic service equivalent. On the other hand, the nature of transactions in category 'A' effectuated by the assessee to its AE abroad as well as third party distributors involve supply of servicing spares and are purely in the realm of after-sale distribution. The assessee which manufactures vehicles and sells the same, also undertakes supply of spares and components required for servicing of such vehicles sold by it. Quite clearly, the supplies so undertaken are from already firmed-up sources, inasmuch as the assessee is the manufacturer of vehicles in which such components are used, and at the time of procurement for manufacturing the assessee has mandated 10 the dies, design, quality, warranties, etc. Thus, supply of spare-parts and components as purely after-sales distribution results in higher margins. In contrast, the sourcing of products for overseas AE entailing category 'B' and 'C' transactions, the assessee has very limited role to play, which is akin to logistics support service provider.
11. In this background, we therefore deem it proper to conclude that even according to the internal TNMM mechanism sought to be applied, the comparison of margin of transactions of category 'B' and 'C' undertaken with the AEs is incomparable with the transactions undertaken with the third parties (i.e. non-AEs) which are purely in the nature of category 'A'. Ostensibly, the transactions of Category 'B' and 'C' are not undertaken with third parties (i.e. Non-AEs).
12. So, however, in so far as the transactions of category 'A' representing export of spares and components which are required for the purpose of servicing of vehicles sold by the assessee company, the transactions undertaken with third party distributors (i.e. non-AEs) are comparable to the transaction with the AEs. On this aspect, it is evident on the basis of the tabulation in para 7 that the profit margin (on cost) in relation to export to AEs is 67% and on transactions of exports to third party distributors (i.e. non-AEs) is 56.58% and the same clearly depicts that the transaction undertaken by the assessee of category 'A' with its AEs, namely, export of spares and components which are required for the purpose of servicing of vehicles sold by the assessee have been undertaken at an arm's length price and the same does not require any transfer pricing adjustment as done by the income-tax authorities.
13. Now, we are left with the transactions of category 'B' and 'C' which have been undertaken by the assessee with its AE. In so far as such transactions are concerned, there is no internal comparable transaction, 11 inasmuch as such like transactions have not been carried out with non-AEs. The transactions of such nature involving sourcing of spares and components used in the manufacture of vehicles undertaken by the AE abroad have not been undertaken by the assessee with non-AEs. Therefore, in the absence of any internal transactions with third parties with similar functions and economic scenario, benchmarking of transactions of category 'B' and 'C' undertaken with AEs, cannot be done appropriately by invoking the internal TNMM mechanism. In this context, the assessee pointed out that for benchmarking the transactions between the assessee and the AEs in respect of such activities, the assessee has undertaken comparison with operating margins earned by third party support service providers in India and tabulation in this regard has been placed in page 223 of the Paper Book No. II. It is sought to be made out that the margins declared by the assessee on such activity at 11.05% compare favourably with the average operating margins earned by third party support service provider companies in India which worked out to 5.1%. In our considered opinion, the aforesaid plea of the assessee is liable to be examined with respect to its factual aspects. For the stated purpose, we therefore remand the issue back to the file of the Assessing Officer who shall carry out the requisite verification exercise and after being satisfied, he shall pass an appropriate order in accordance with law on this aspect.
14. Apart from the aforesaid, the learned Counsel for the assessee submitted that the benefit of +/-5% as envisaged in the proviso to section 92C(2) of the Act has not been granted to the assessee and in support, reliance has been placed on various Tribunal decisions as under:
i) Bindview India P. Ltd. v. DCIT vide ITA No 1386/PN/10 (Pune)
ii) Skoda Auto India P. Ltd. v ACIT 122 TTJ 699;
iii) Policy Network P. Ltd, ITA No 5504/Del/10;12
iv) M/s SAP Labs India P. Ltd v ACIT, ITA No 398/Bang/08;
v) Development Consultants (P) Ltd v. DCIT 115 TTJ 577;
vi) Sony India (P) Ltd v. CBST 288 ITR 52;
vii) Electrobug Technologies Ltd. v. ACIT 37 SOT 270;
viii) Abode Systems India (P) Ltd v. ACIT, ITA No 5043/Del/10; and,
ix) Haworth (I) P.Ltd v. DCIT, ITA No 5341/Del/10
15. The learned Departmental Representative, with regard to the benefit of +/-5% sought by the assessee in terms of proviso to section 92C(2) of the Act, submitted that in terms of the amended proviso to section 92C(2) with effect from 1.10.2009 the claim of the assessee was not justified as the amendment was also applicable to the assessment year in question. According to the learned Departmental Representative, the benefit of +/-5% intended by the erstwhile proviso to section 92C(2) of the Act was not available to the assessee for the year under consideration.
16. We have carefully considered the rival submissions. One of the issues raised by the assessee in this appeal is with regard to the claim seeking benefit of the option available under the erstwhile proviso to section 92C(2) of the Act, which allows the assessee an option for adjustment of +/-5% variation for the purpose of computing ALP. Such an issue has been a subject-matter of consideration by the Pune Bench of the Tribunal in the case of Starent Networks (India) P. Ltd. in ITA No. 1350/PN/10 dated 03.10.2011, whereby following discussion is relevant:
"20. We have carefully considered the rival submissions. In this case, a pertinent issue which has been vehemently agitated by the appellant is with regard to its claim of seeking benefit of the option available under the erstwhile proviso to section 92C(2) of the Act. The erstwhile proviso which was inserted by Finance Act, 2002 with effect from 1.4.2002 read as under:
"Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five percent of such arithmetical mean."
As per the said Proviso, an option is available to the assessee for adjustment of +/-5% variation for the purposes of computing ALP. As per the Proviso, where more than one price is determined by the most appropriate method, the arm's length price shall 13 be taken to be the arithmetical mean of such prices or at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean. The point made out by the assessee is based on the latter part of the Proviso whereby an option is given to the assessee to take an ALP which may vary from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean. Firstly, the claim of the Revenue is that such benefit is not available to the present assessee, because the price of international transaction disclosed by the assessee exceeds the margin provided in the Proviso. This aspect of the controversy, in our view, is no longer germane in view of the plethora of decisions of our co-ordinate Benches, namely, Sony India (P) Ltd. (supra); Electrobug Technologies Ltd. (supra), and Development Consultant P Ltd v DCIT 115 TTJ 577 (Kol.) wherein it has been observed that the benefit of the option contained in the latter part of the Proviso to section 92C(2) is available to all assessees, irrespective of the fact that price of the international transaction disclosed by them exceeds the margin prescribed in the Proviso.
21. So, however, the other argument set up by the Revenue and which has been more potently argued is to the effect that the benefit of such Proviso is not available to the assessee in the instant case, because the said Proviso has been amended by the Finance (No 2) Act, 2009 with effect from 1.10.2009 which reads as under:
"Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices:
Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price."
The case set up by the Revenue is that the amended Proviso shall govern the determination of ALP in the present case, inasmuch as the amended provisions were on statute when the proceedings were carried on by the Transfer Pricing Officer (TPO). As per the Revenue, the amended Proviso would have a retrospective operation and in any case, would be applicable to the proceedings which are pending before the TPO on insertion of the amended Proviso, which has been inserted by the Finance (No. 2) Act, 2009 with effect from 1.10.2009 and, in this case, the TPO has passed his order on 30.10.2009. The learned Departmental Representative has also referred to the CBDT Circular No 5/2010 (supra) read with Corrigendum dated 30.9.2010 issued by the CBDT in this regard. Per contra, the stand of the assessee is that the amended Proviso would be applicable prospectively and would not apply in respect of the stated assessment year, which is prior to the insertion of the amended Proviso with effect from 1.10.2009.
22. We have carefully examined the rival stands on this aspect. The amended Proviso has been brought on the statute by the Finance (No. 2) Act, 2009 with effect from 1.10.2009. The Explanatory Notes to the provisions of Finance (No 2) Act, 2009 contained in circular No 5 of 2010 (supra) provides the objective behind the amendment of the Proviso. The Legislature noticed the conflicting interpretation of the erstwhile proviso by the assessee and the income-tax Department. The assessee's view was that the arithmetical mean should be adjusted by 5% to arrive at ALP, whereas the departmental view was that no such adjustment is required to be made if the variation between the transfer price and the arithmetical mean is more than 5% of the arithmetical mean. With a view to resolving this controversy, the Legislature sought to amend the proviso to section 92C(2), which has been reproduced by us in the earlier part of this order. In the said Circular, it has also been elaborated that the above amendment has been made applicable with effect from 1.4.2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years. In any case, the Proviso contains a prescription to determine the ALP and quite clearly it is a substantive provision encompassing the eventual determination of an assessee's tax liability. Thus, it can be said that the Proviso is not a procedural piece of legislation and therefore, unless it is so clearly intended, the newly amended proviso cannot be understood to be retrospective in nature. In fact, it is a well-settled proposition that the statutory provisions as they stand on the first day of April of the assessment year must apply to the assessment of the year and the 14 modification of the provisions during the pendency of assessment would not generally prejudice the rights of the assessee. Furthermore, we are fortified by the intention of the Legislature as found from circular No 5 of 2010 (supra) whereby in para 37.5, the applicability of the above amendment has been stated to be with effect from 1.4.2009 so as to apply in respect of assessment year 2009-10 and subsequent years. In this regard, we also find that the Delhi Bench of the Tribunal in the case of ACIT v UE Trade Corporation India (P) Ltd. vide ITA No 4405(Del)/2009 dt 24.12.2010 has observed that the proviso inserted by the Finance (No 2) Act, 2009 would not apply to an assessment year prior to its insertion. In this view of the matter, we therefore find no justification to deny the benefit of +/-5% to the assessee in terms of the erstwhile Proviso for the purposes of computing the ALP.
23. However, before parting we may also refer to a Corrigendum dated 30.9.2010 by the CBDT by way of which para 37.5 of the circular No 5/2010 (supra) has been sought to be modified. The Corrigendum reads as under:
" CORRIGENDUM In partial modification of Circular No. 5/2010 dated 03.6.2010,
(i) In para 37.5 of the said Circular, for the lines st "the above amendment has been made applicable with effect from 1 April, 2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years."
the following lines shall be read;
st "the above amendment has been made applicable with effect from 1 October, 2009 and shall accordingly apply in relation to all cases in which proceedings re pending before the Transfer Pricing Officer (TPO) on or after such date."
st
(ii) In para 38.3, for the date "1 October, 2009, the following date shall st be read: "1 April, 2009".
In terms thereof, it is canvassed that the amended proviso has been made applicable with effect from 1.10.2009 and shall apply even to cases where proceedings were pending before the TPO on or after such date, irrespective of the assessment year involved and, therefore, in the instant case the benefit of the erstwhile proviso cannot be extended to the assessee. We have carefully pondered over the assertion made by the appellant that the Corrigendum is untenable in the eyes of law. Firstly, the said corrigendum does not bring out any preamble so as to throw light on the circumstances and the background in which the same has been issued. Secondly, it is well understood that the Explanatory Notes to the provisions of a Finance Act passed by the Parliament seeks to explain the substance of the provisions of the Act as intended by the Legislature. In fact, the Hon'ble Supreme Court in the case of K.P Varghese v ITO 131 ITR 597 (Ker) emphasized the sanctity of the statements contained in the Explanatory Notes of the provisions and stated that the interpretation placed in such documents is binding interpretation of law. The contents of the Corrigendum are quite inexplicable. Notwithstanding the aforesaid and without going into the validity of the Corrigendum dated 30.9.2010 (supra), we are of the view that the same would not operate to the detriment of the assessee since at the relevant point of time the contents of the Circular No 5/2010 (supra) were in operation. In other words, the withdrawal of the interpretation placed in circular No 5 /2010 (supra) on the applicability of the amended proviso is sought to be done away by the Corrigendum dated 30.9.2010 and, therefore, such withdrawal shall be effective only after 30.9.2010, even if such Corrigendum is accepted as valid. We may note here that the appellant has assailed the validity of the Corrigendum itself on which we have not made any determination. Therefore, the Corrigendum dated 30.9.2010, in our considered opinion, has no bearing so as to dis-entitle the assessee from its claim of the benefit of +/-5% in terms of the erstwhile proviso to section 92C(2) of the Act. In coming to the aforesaid, we have been guided by the parity of reasoning laid down in the judgments of the Hon'ble Bombay High Court in the cases of BASF (India) Ltd. v CIT 280 ITR 136 (Bom); Shakti Raj Films Distributors v CIT 213 ITR 20 (Bom); and, Unit Trust of India & Anrs. v ITO 249 ITR 612 (Bom). The Hon'ble High Court has 15 opined in the case of BASF (India) Ltd. (supra) that the circulars which are in force during the relevant period are to be applied and the subsequent circulars either withdrawing or modifying the earlier circulars have no application. Moreover, the circulars in the nature of concession can be withdrawn prospectively only as held by the Hon'ble Supreme Court in the case of State Bank of Travancore v CIT 50 CTR 102 (SC). Considering all these aspects, we therefore find no justification in the action of the lower authorities in disentitling the assessee from its claim for the benefit of +/- 5% to compute ALP in terms of the erstwhile proviso to section 92C(2) of the Act. We order accordingly."
17. In view of the precedent, the stand of the Revenue in the present case to deny the assessee benefit for adjustment of +/-5% variation while computing ALP is not justified. As per the Tribunal, though the amended proviso to section 92C(2) was applicable with effect from 1.10.2009, so however, for the reasons contained therein, it would not cover such like cases as is the case before us. In para 22 of the order, which has been reproduced above, it has been observed that the applicability of amendment is to be effective in respect of assessment years 2009-10 and subsequent years and such inference was found to be fortified by the decision of the Delhi Bench in the case of ACIT v UE Trade Corporation India (P) Ltd. vide ITA No 4405(Del)/2009 dt 24.12.2010. Apart from the aforesaid precedent, the assessee has also referred to certain Tribunal decisions, which are on similar lines. In view of the aforesaid discussion, we find no justification in the action of the lower authorities from disentitling the assessee from its claim of +/-5% while computing ALP in terms of erstwhile proviso to section 92C(2)of the Act. On this aspect, we uphold the plea of the assessee. However, as we have remanded the matter to the file of the Assessing Officer with regard to the benchmarking of transactions of Category 'B' and 'C' undertaken by the assessee with its AEs, on the instant aspect also, the Assessing Officer shall pass an order afresh considering the aforesaid precedent and the concurrent legal position prevailing on this subject.
18. In the result, we therefore restore the issue relating to addition of Rs 5,68,14,644/- made by the Assessing Officer on account of transfer pricing 16 adjustment back to the file of the Assessing Officer to re-determine the ALP of the impugned international transaction as per aforesaid observations and directions. Thus, the assessee succeeds on Ground Nos. 1 to 3 for statistical purposes.
19. In Ground No 4, the plea of the assessee is that the income-tax authorities have wrongly denied the claim of depreciation of Rs 20,08,933/- on the amount of Rs 4,30,00,000/- accounted for as goodwill by the assessee in its books of account.
20. In this regard, the brief facts are that assessee had entered into an agreement with M/s Greaves India Ltd on 4.9.98 whereby it acquired the latter's 3-wheeler manufacturing plant situated at Baramati. Out of the total purchase consideration, a sum of Rs 4,30,00,000/- was stated as goodwill in the account books and depreciation on the same was claimed in the return of income filed. The claim has been denied by the income-tax authorities in this year for the similar reasons as adopted by the Revenue in the past. The background is that the dispute regarding depreciation on the goodwill arose for the first time in the assessment year 2002-03 wherein the Tribunal has restored the matter back to the file of the Assessing Officer with directions to verify the true nature of the intangible assets acquired by the assessee and thereafter, decide the issue afresh. Subsequently, the Tribunal for the assessment years 2003-04 and 2004-05 vide its order in ITA Nos 965, 966 & 1203/PN/09 dated 6.4.2011 considered the observations of the Assessing Officer in the remand proceedings of the assessment year 2002-03 and upon noticing the decision of the Vishakhapatnam Bench of the Tribunal in the case of Jeypore Sugar Co Ltd v ACIT 2011 9 Taxman.com.122 (Visakh.), again restored the matter back to the file of the Assessing Officer for examination afresh in the light of such decision.
17
21. In this background, the learned Counsel for the assessee further supported the claim of the assessee in principle, on the basis of a subsequent decision of the Hyderabad Bench of the Tribunal in the case of A.P. Paper Mills Ltd. v. ACIT 33 DTR 148 (Hyd).
22. On the other hand, the learned Departmental Representative, appearing for the Revenue, has not contested the aforesaid factual matrix brought out by the learned Counsel on behalf of the appellant.
23. Having regard to the precedents, where the matter has been restored for re-adjudication by the Assessing Officer in the past years, in the instant year also we deem it fit and proper to restore the matter to the file of the Assessing Officer to examine the issue in the light of the observations of the Tribunal in the assessee's own case for the past years and also on the basis of any further submissions that the assessee may deem proper to raise before him in the ensuring remand proceedings. Accordingly, Ground No. 4 in the appeal of the assessee stands allowed for statistical purposes.
24. In so far as Ground No. 5 is concerned, it relates to the disallowance of assessee's claim for additional depreciation amounting to Rs 15,01,754/- in respect of computers installed in its factory at Baramati.
25. In this context, it was a common ground between the parties that similar issue was a subject matter of consideration of the Tribunal in the assessee's own case for assessment year 2004-05 while considering Revenue's appeal vide ITA No 1203/PN/09 dated 6.4.2011. The Department has not raised any objection to the assertion by the assessee that the precedent by way of the order of the Tribunal dated 6.4.2011 (supra) on this aspect continues to hold the field and has not been altered by any higher authority. As a result thereof, following the precedent we allow assessee's claim of additional depreciation of Rs 15,01,754/- on computers installed in its factory. Resultantly, the order of the Commissioner of Income-tax (Appeals) is set aside and the Assessing 18 Officer is directed to allow the claim of the assessee. Thus, Ground No. 5 in the appeal of the assessee stands allowed.
26. In respect of Ground No. 6, the grievance of the assessee is that the income-tax authorities have erred in disallowing the assessee's claim of depreciation in respect of lease hold rights in land. Alternatively by way of Ground No 7 the plea of the assessee is that it be allowed deduction for lease rentals paid in advance for obtaining lease hold rights over the period of lease of 89 years.
27. The brief background is that assessee paid a total consideration of Rs 19,00,60,195/- for acquiring lease-hold rights of land. The assessee had acquired lease hold rights from Greaves India Ltd in respect of assignment of rights by MIDC for a total consideration of Rs 1,57,76,570/- vide assignment deed dated 10.7.1998. Similarly, it had paid balance consideration of Rs 17,42,83,623/- when the Scheme of merger was approved by the Hon'ble Bombay High Court on 1.2.2002. It had been explained by the appellant that the assessee had staked its claim of depreciation in respect of the lease hold rights, being intangible assets, by way of Notes to the return of income filed for the stated assessment year and the same was pressed before the Assessing Officer during the course of assessment proceedings. The Assessing Officer declined the claim of the assessee by placing reliance on the judgment of the Hon'ble Bombay High Court in the case of CIT v. Techno Shares & Stocks Ltd. 323 ITR 69 (Bom). It has been pointed out that subsequently the said decision of Hon'ble Bombay High Court has been overruled by the Hon'ble Supreme Court in the case of Techno Shares & Stocks Ltd. v. CIT reported at 327 ITR 323 (SC). Apart therefrom, it has been pointed out that on similar issue for assessment years 2003-04 and 2004-05 the Tribunal in its order dated 6.4.2011 (supra) has restored the matter to the file of the Assessing Officer to examine whether lease hold rights acquired for the purpose of 19 business are in the nature of commercial or business rights as contemplated in section 32(1)(ii) of the Act. In view of the aforesaid, on the aspect of assessee's claim for depreciation on lease hold rights, we deem it fit and proper to restore the matter back to the file of Assessing Officer to be decided in the light of the observations of the Tribunal contained in the order dated 6.4.2011 (supra) as also on the basis of any further submissions that may be sought to be raised by the assessee in the ensuring remand proceedings.
28. In so far as the alternative claim of the assessee for allowing proportionate deduction for the premium paid to MIDC over the period of lease is concerned, the learned Counsel pointed out that the same is supported by the decision of the Hon'ble Gujarat High Court in the case of DCIT v. Sun Pharmaceutical India Ltd. 329 ITR 479 and SLP filed by the Department against the said decision before the Hon'ble Supreme Court also stands dismissed as reported in 325 ITR (St) 6. The learned Counsel also pointed out that following the aforesaid decisions, the Mumbai Bench of the Tribunal in the case of Emerson Network Power India Pvt. Ltd. (ITA 118/Mum/10 dated 25.3.2011) has allowed deduction for the lease hold premium paid to MIDC for acquiring lease hold rights over the period of lease, and a copy of such decision was placed on record. However, it has also been brought out that such alternative plea has otherwise been decided against the assessee by the Tribunal in the assessee's own case for assessment years 1997-98 and 1998-
99.
29. In view of the aforesaid background of the dispute, in our view, it would be appropriate that the subsequent legal position resulting on account of the decision of the Hon'ble Gujarat High Court in the case of Sun Pharmaceutical India Ltd (supra) ought to be considered when it comes to adjudicating the alternative claim of the assessee contained in Ground No. 7 before us. As the substantive plea of the assessee is on account of depreciation on lease hold 20 rights, which has been set asi1de to the file of the Assessing Officer in terms of Ground No 6 above, the impugned alternative plea therefore is also set aside to the file of the Assessing Officer for fresh adjudication in the light of above observations as well as on the basis of any further submissions that may be sought to be raised by the assessee in the ensuring remand proceedings. Thus, Ground No. 6 &7 in the appeal of the assessee are treated as allowed for statistical purposes.
30. In the result, appeal of the assessee is partly allowed.
Sd/- Sd/-
(I C SUDHIR) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune, Dated 23 rd July, 2012
B
Copy to:-
1) Assessee,
2) DCIT Cir, Pune,
3) The CIT(A)-II, Pune
4) CIT-II, Pune
5) DR, "A" Bench, I.T.A.T., Pune.
6) Guard File
True copy By Order
Sr. PS, ITAT Pune
Order pronounced in Court on 23rd July, 2012.
Sd/- 23.7.12 Sd/-
(SHAILENDRA KUMAR YADAV) (G S PANNU)
JM AM